Principles II
Boz Boxes Case Study
Spring 2020
The date is January 1, 2019. Wyatt and Sofia work as managers of Palacios Pizza. One thing they can’t help but noticing is that Palacios seems to pay a lot of money for its pizza boxes. After talking with the store’s owner Carmen, they learned that Palacios pays about $200 for each container of pizza boxes. A container holds 2,500 pizza boxes. Apparently, Carmen has shopped this business around and $200 is the cheapest price she can find for a container of 2,500 pizza boxes.
Wyatt and Sofia immediately decide to venture on their own to form their own pizza box manufacturing company named Boz Boxes, Inc. They rent a portion of a small building for $3,000 per month. They also rent a machine which could cut pizza boxes for $4,000 per month. They hire 2 hourly employees, Martin and Paul. They pay Martin $20 per hour and Paul $15 per hour. Sofia and Wyatt focus on the marketing and strategic planning side of the business. Sofia and Wyatt each inherited $250,000 and each contribute that full amount to the business.
The date is now December 31, 2019. In 2019, the first year of operations, Boz Boxes recorded the following results:
- Raw Materials purchased – 1,000,000 pounds of paper
- Raw Materials at December 31, 2019 – 0 pounds
- Total paid for paper – $500,000
- Containers made – 3,000
- Containers sold – 3,000
- Total sales – $580,000
- Wages paid to Martin – $40,000 (2k hours worked)
- Wages paid to Paul – $30,000 (2k hours worked)
- Salaries taken by Sofia and Wyatt – $50,000 each
- Benefits – 20% of wages/salaries paid (increase wages/salaries by benefits)
- Fixed administrative expenses – $25,000
- Machine hours – 2,000
- Utilities – $10,000
- Building rent – $36,000
- Equipment rent – $50,000 (rates increased during the year)
- Accounts receivable as of 12/31/19 – $50,000
- Accounts payable as of 12/31/19 – $75,000
Assignment 1 – Prepare a schedule of raw materials used in production, a schedule of cost of goods manufactured, an absorption costing income statement, and a balance sheet for Boz Boxes for 2019.
Wyatt and Sofia are crushed at the results of their business in 2019. They cannot figure out where they went wrong. They hired you to perform an accounting analysis as of the end of the year. You first asked them what production standards they had set and they responded by giving you a blank stare. You decided to refine your question. You asked them how much paper they expect that they should use in each container. They said 300 pounds. You asked them how much they expect to pay for each pound of paper. They said 45 cents. You asked them how many direct labor hours they expect to make a container. They said 1. They also said that they expected their direct labor cost to be an average of Martin and Paul’s rates, which is $17.50, plus benefits. You ask them how many machine hours it should take to make a container. They said .5. You ask them how much utilities expense they should incur per machine hour. They say $6. They had expected $84,000 of fixed overhead ($7k of rent expenses * 12 months) as they hadn’t expected machine rent to increase. They had expected to produce and sell 4,000 units in 2019.
Assignment 2 – Prepare a standard cost card to manufacture 1 container. Compute expected total manufacturing cost at actual production (3,000 units), and compare this expected cost to actual costs to compute a total variance.
Assignment 3 – Compute the 8 Materials, Labor, VOH, and FOH variances. List a possible reason for each variance
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